Rentokil Inital Plc (LON:RTO), today announced 2018 preliminary results.
2018 Highlights
● Revenue, profit and cash all in excess of medium-term financial targets: Ongoing Revenue up 13.2%, Ongoing Operating Profit up 13.3% and Free Cash Flow of £192.0m (94% cash conversion)
● Organic Revenue growth of 3.7% in line with medium-term target of 3% to 4% (adjusted for Puerto Rico 4.0%), H1: 3.0% and H2: 4.3%
● 12.6% Ongoing Revenue growth in Pest Control (+4.8% Organic), driven by strong innovation and digital performance, as recognised by The Queen’s Award for Enterprise – Innovation
● 26.5% Ongoing Revenue growth in Hygiene (+2.8% Organic), reflecting acquisitions of CWS Italy and Cannon Hygiene
● France returned to year-on-year profitable growth, up 2.9%
● An excellent year for M&A:
o 47 businesses acquired in Growth and Emerging markets with combined annualised revenues of £170.0m for cash spend of £298.4m
o 42 acquisitions in Pest Control, 4 in Hygiene and 1 small Ambius business
o Acquisitions continue to build density across our key markets and deepen our expertise in new and high-growth areas including vector control and fumigation
● UK Pension scheme buy-in secured in contemplation of full buy-out and wind-up of the scheme which is expected to complete in 2020 with an estimated pre-tax cash surplus of £20m to £40m
● Recommended final dividend of 3.16p to bring total dividend for 2018 to 4.471p, an increase of 15.2%
Andy Ransom, CEO of Rentokil Initial plc, said:
“We continue to execute our Right Way plan to deliver revenue and profit growth and the business has performed very well in 2018. In Pest Control, our focus on innovation and digital technology to drive growth is working well and is a core strength of the business. Hygiene has performed strongly, not only aided by the very good acquisitions of CWS Italy and Cannon Hygiene but organically, with a delivery of 2.8% towards the top of our range of growth expectations. In addition, 18 months ago we set ourselves an ambitious objective of returning our France business to year-on-year profitable growth and we are delighted to have achieved this in 2018.
“We have delivered a very strong year of M&A, with a record 47 high-quality acquisitions building scale and density and also enabling us to broaden our expertise in newer growth areas, such as vector control and fumigation. We have a very active pipeline of high quality prospects in place, so I am confident of another good year in 2019.
“Our performance this year has been underpinned by good progress across our ‘Employer of Choice’ people agenda which has a particular focus on short-term retention. I am also delighted that we were able to secure a buy-in for our UK defined benefit pension scheme. This transaction is a fantastic outcome for our pensioners, the Company and our shareholders. While many other companies will have to continue investing into their pension schemes for years to come, we can focus our future investments on delivering profitable growth.
“2018 was a very good year for Rentokil Initial and I am delighted that we have again exceeded our medium-term financial targets for revenue, profit and cash. We are confident of delivering further progress in 2019 and anticipate a slight increase in market expectations for 2019.”
Revenue
Ongoing Revenue, which excludes disposed businesses, increased by 13.2% in 2018, with all regions contributing to growth. 2018 was a very strong year for M&A with acquisitions contributing 9.5% to Ongoing Revenue growth. Group Organic Revenue growth of 3.7% was in line with financial targets, but affected in H1 by the ongoing impact of last September’s hurricane on our operations in Puerto Rico and unseasonably cold weather in March and April in North America. Organic growth improved to 4.3% in the second half from 3.0% in H1. Adjusting for the impact of Puerto Rico, Group Organic growth for the year was 4.0% and at the upper end of our medium-term target of 3% to 4%.
Ongoing Revenue in Pest Control grew by 12.6% during the year of which 4.8% was Organic Revenue growth (5.3% after adjusting for the impact of Puerto Rico) with the balance delivered from acquisitions. The business enjoyed favourable weather conditions across Europe and the UK which has supported stronger jobbing revenues, particularly in H2. Hygiene reported increased revenues of 26.5%, up 2.8% on an Organic basis and aided by the acquisition of Cannon Hygiene Services in January 2018 and CWS Italy in the second half of 2017. Ongoing Revenue in our Protect & Enhance businesses increased by 0.7%, reflecting improvements in our French Workwear business (up 0.9%) and Ambius (up 3.1%) but offset by ongoing pressures in UK Property Care (down 17.4%).
Total Revenue of £2,472.3m increased by 2.5% at AER, reflecting growth in Ongoing Revenue of 13.2% (at CER), offset by the disposal of businesses in 2017 and the adverse impact of foreign exchange. Disposals in 2017 included the transfer of the Hygiene and Workwear assets to the Haniel joint venture and the divestment of the flat-linen laundries in France.
Profit
Ongoing Operating Profit, which excludes the results of disposed businesses, increased by 13.3% in 2018, reflecting growth in all regions and the return to profitable growth in France. Restructuring costs amounted to £7.3m at CER (2017: £7.3m) consisting mainly of costs in respect of initiatives focused on driving operational efficiency in North America, France and the UK.
In December 2018 the Company reached agreement for a bulk annuity insurance ‘buy-in’ for its UK Defined Benefit Pension scheme (“the Scheme”). The ‘buy-in’ has been secured in contemplation of a full ‘buy-out’ and winding up of the Scheme which is expected to complete in 2020. On completion of the buy-out it is anticipated that there will be a pre-tax cash surplus of £20m to £40m which will be returned to the Company. The accounting surplus at the date of agreement of £326.0m (which was £325.4m at 31 December 2017) has been written down to the estimated cash surplus, resulting in a one-off non-cash charge of £341.6m in the year. As a result the Company recorded a loss before tax for the year at actual exchange rates of £114.1m (2017: profit before tax of £713.6m). The 2017 profit before tax included a one off net profit of £449.0m on the disposal of the businesses referred to above.
Adjusted profit before tax at actual exchange rates of £308.0m, which excludes the impact of the one-off items noted above, increased by 7.4% on 2017, reflecting growth in all regions of operation partially offset by the adverse impact of foreign exchange.
Cash (at AER)
Operating cash inflow of £283.5m was £25.1m higher than 2017. Lower levels of EBITDA following the transfer and sale of Workwear and Hygiene assets to Haniel and RLD in 2017 were more than offset by a reduction in capex levels and favourable working capital inflows of £6.6m, in part due to phasing around the 2018 year end. The first cash dividend from the Haniel joint venture in relation to the six months ended 31 December 2017 of €9.5m was received in Q3 2018.
Interest payments of £45.3m are £3.9m higher than in the prior year due to an increase in US dollar interest rates and the increased net debt levels following the successful M&A programme in the year and tax payments increased by £5.0m reflecting the higher profitability of the businesses. This resulted in Free Cash Flow of £192.0m, representing an increase of £16.2m on the prior year and an adjusted Free Cash Flow conversion of 94% (2017: 87%), ahead of our medium-term target of ~90%. Spend on current and prior-year acquisitions totalled £298.4m and dividend payments were £74.2m, an increase of £9.9m (15.4%) on the prior year. Foreign exchange translation and other items increased net debt by £42.5m, leaving an overall increase in net debt of £226.2m and closing net debt of £1,153.5m.
M&A
2018 was a very strong year of acquisitions for the Company, particularly in regard to pest control deals in Growth and Emerging markets. In the year we acquired a record 47 businesses – 42 in Pest Control, four in Hygiene and one small Ambius business – generating annualised revenues in the year prior to purchase of £170m. Total spend, including prior year acquisitions, was £298.4m. Countries in which we have acquired new businesses include Australia, Brazil, Canada, Chile, Colombia, Costa Rica, Dutch Antilles, France, Germany, Indonesia, Jamaica, Macau, Malaysia, Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Turkey, United Arab Emirates, and the US.
Going forward, we will continue to execute a differentiated and disciplined approach to capital investment and M&A, with clear IRR hurdles by business line. We will continue to seek further acquisition opportunities in 2019 in both Pest Control and Hygiene and the pipeline of prospects remains strong. Our anticipated spend on M&A in 2019 is expected to be in the region of £200m to £250m. In 2019 to date we have acquired six businesses with annualised revenues of c. £25m.
